Outlook on precious metals and crude oil 2017

Evdokia Pitsillidou, Head of Risk Management at easyMarkets.
She specialises in commodities, options and currencies and loves to solve analytical problems and overcome challenges.

It has been a rather interesting year for the commodities markets, and what kept them unsettled could be a number of factors including the U.S. elections and Brexit. But in general, it was the overall strength of the dollar that had an impact on commodity prices to on varying degrees.

The U.S. dollar is one of the top performing currencies during this year, mainly because of the Federal Reserve’s (Fed) repeated comments on the strengthening of the economy and the voicing of its intentions of an interest rate increase which was realised with a 0.25% rate hike just before the year-end. Hence, all dollar-denominated commodity prices were affected by the greenback’s performance before and after the 14 December interest rate increase voted unanimously by the Federal Open Market Committee (FOMC) members.

At the beginning of 2016 gold’s price, which is considered the most popular amongst the precious metals family, began trading at $1,065.99 per ounce. During July the price of the yellow shiny metal reached $1,375.01 per ounce which ended up being its highest level of the year, while now it is hovering above the $1,132 per ounce price.

During 2016, gold prices managed to increase by 6.3%, and it is apparent that the annual gains could have been much higher if it wasn’t for the Fed’s outlook on the U.S. economy. Moreover, the Fed Chairwoman Janet Yellen estimates that there may be another three rate hikes during 2017. So given that the markets are forecasting for the dollar to continue appreciating, gold could be at risk for more losses.

Similar to the gold’s performance, silver prices also surged by a massive 52.6% to $21.1175 per ounce during July from $13.8335 per ounce at the start of the year. However, from August onwards the Fed’s forecasts and subdued demand by the industrial sector knocked the price down to the current level of $15.7268 per ounce.

Demand for silver may is not expected to weaken given that only a fraction of silver’s production comes from mines. But although demand continues to be strong, the commodity’s price might fall due to the continuous strengthening of the dollar and possible interest rate hikes.

High levels of volatility have also been observed in the price of crude oil. Outlook for demand was low and combined with macroeconomic unpredictability and a supply glut; prices may took a knock down to $26.04 per barrel at some point during February. The “black gold’s” price levels were also hit from a conflict for market share between OPEC (Organization of the Petroleum Exporting Countries) and shale oil producer United States.

There were a number of attempts by OPEC members to act in order to prevent the continuation of falling crude oil prices through talks between them and non-OPEC members such as Russia. Eventually, on 30 November during its meeting in Vienna, OPEC reached an agreement to reduce its overall oil production by 1.2 million barrels per day.

Despite the above agreement, United States President-elect is known as a crude oil supporter and this by itself could imply increase in the country’s oil production. The outlook for oil prices becomes even more uncertain when the commitment by OPEC members to reduce production levels is brought into question. In case the agreement is breached, the current upwards trend of crude oil’s price could once again come to an end.

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